Gold’s Silver Lining has a Touch of Grey

For thousands of years, gold has long been used as a store of value or what is also referred to as a hedge against inflation. For investors, it works well with portfolio diversification given its low correlation to equities and bonds. And while it does not stand up to the performance returns of bitcoin (does anything?), it also does not have 70% - 85% cyclical drawdowns like bitcoin.   

Gold is a safe-haven, defensive asset that hedges against economic and financial downturns or geopolitical unrest. Over the last 50 years (1974), the precious metal has had a positive return in 11 of the 15 (73%) worst quarterly performances for the S&P 500. It was resilient in 2022 (-0.3%) when the 60/40 equity-bond portfolio had one of its worst years on record. Since the start of this century (23 years!), gold has appreciated 610%, over which time the Nasdaq 100 and S&P 500 have total returns of 441% and 410%, respectively.  

There is a bit of cherry-picking with those 23-year comps as the stock market was only a few months away from the Dotcom bubble highs at the start of 2000. Over the last 20 years (2003-2023), gold rose a less dramatic 397%, which grossly underperformed the 535% total return by the S&P 500. However, there are full market cycles when gold outperforms the equity market.   

Following the bursting of the Dotcom bubble, the S&P 500 bottomed more than 2½ years later (31 months) on October 9th, 2002. The stock market’s next cycle high took place exactly five years later, on October 9, 2007. Over this time, the S&P 500 had a total return of 121% and underperformed gold’s return of 131%. In the next five years (10/9/2007 – 10/9/2012), which included the bursting of the housing bubble, gold grossly outperformed stocks with a gain of 135% vs. a total return of just 2.9% for the S&P 500. Conversely, over the most recent ten years (2013 – 2023), the S&P 500 has a total return of 211% vs. gold’s 72%.    

The current price action in gold is worthing paying attention to. In March, the precious metal not only returned 9.1% for its best monthly performance since July 2020 in the early days of post-Covid rebound, but far more importantly it made a bullish breakout from a 3½-year trading range. Already in April gold is showing its upside momentum by advancing another 5.5%.  

Spot Gold (Weekly Period)

Gold’s longer-term setup (monthly period) shows its upside potential from here. It returned 657% during its ten-year cycle from 2001 to 2011. From there, the precious metal went into a long stretch of corrective price action before finally returning to its prior cycle high (1,921) nine years later in the summer of 2020. Over the ensuing 3½ years into February 2024, it has been in a sideways trading range making marginal new highs, but never achieving that escape velocity and upside momentum versus its prior cycle highs in 2011. As recently as November 2023, it was down more than 5% from the 2011 high.  

From this longer-term perspective, the price action since March is arguably a bullish breakout from a 13-year period of consolidation following a prior steep uptrend (2001 – 2011). Breakouts from large consolidation ranges can often be accompanied by strong, long-lasting momentum. The size of the consolidation range measures 875 points (2011 high to 2015 low) which based on traditional technical analysis projects a minimum measured move to $2,796, or +19% from yesterday’s close. While gold is already +126% from its 2015 low, a 657% gain, like it saw in the 2000s, would bring it towards ~$7,900. 

Spot Gold (Monthly Period)

The Silver Lining

Silver is seen as a leveraged play on gold. When gold does well, silver often outperforms gold. In the 2000s, when gold returned 657%, silver gained 1,132%. However, there is a touch of grey whereby silver’s relative strength is currently not confirming the bullish breakout in gold. While gold is currently at new all-time highs, silver is more than 75% below its prior cycle highs from 2011. This underperformance is one reason to question the recent strength in gold, but recently, silver is starting to percolate. Last week, silver gained 10.1% for its 5th best weekly performance in ten years. This also marked a bullish breakout from a three-year declining trendline. Silver still has more to prove relative to gold, but the potential is there.  

Spot Silver (weekly period)

Relative Strength

Another cautionary signal that could potentially change in the near term is gold’s relative performance to equities. A long-term ratio (monthly period) of gold to the Dow Jones Industrials (upper panel) shows the precious metal has been underperforming for more than ten years. Legendary technician Martin Pring uses this ratio’s 48-month moving average as a bullish/bearish signal for precious metals. A bullish signal for gold is when the ratio moves above its 48-month moving average and vice versa. While this ratio analysis is not perfect, it has been on the right side of the trend for the majority of time since the early 1970’s. Currently, this ratio is pressing up against its 48-month moving average.  

On an absolute basis gold looks strong with last month’s bullish breakout, but the move is thus far lacking confirmation on a relative basis to silver and the equities asset class. There seems to be a host of reasons why the recent strength in precious metals could be longer lasting. Gold’s historical attractiveness as an inflation hedge fits the post-Covid era. Deficit spending has been underway in a growing economy, and that could continue regardless of which party is in office. The Federal Reserve is close to ending quantitative tightening while on the cusp of a new rate-cutting cycle. Finally, geopolitical tensions are certainly elevated.  

Price is king, and both gold and silver have been underperforming equities for more than a decade. Time will tell how the precious metals cycle unfolds from here, but its recent strength may suggest the dawn is breaking.

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